Where will future demand for oil come from?


Rising oil levels in floating storage, falling Saudi crude prices and slowing Chinese imports: these are some of the factors that have put pressure on oil prices recently. And the reason they put pressure on prices was because they all told the same story: demand isn’t improving as it should. And that is also fueling fears for long-term demand. Would Big Oil’s bet on plastics pay off? Will jet fuel demand ever return to pre-pandemic levels? Demand for gasoline? The future of the oil industry depends on the answers to these questions. The coronavirus pandemic has wiped out demand for millions of barrels of fuel as countries stranded to contain the spread of the disease. This demand is now returning at the end of lockdowns, but it is not returning as quickly and as strongly as some might have hoped, leading to gloomy predictions. Still, U.S. gasoline inventories have seen sizeable declines over the past three months – the driving season is the most active gasoline demand period – and Chinese refiners have been importing oil as if it were not. there was no tomorrow. The picture is not that dark. It will simply take longer for fuel demand to recover.

Last month, in their regular monthly forecasts, the three largest energy authorities – the Energy Information Administration, the International Energy Agency and OPEC – appeared to agree that it would take at least until 2022 for oil demand to return to pre-crisis levels. Some analysts say demand would never return to pre-crisis levels, and they might be right, especially if vaccine development takes more than a few months – which it usually does – and the world starts to fall apart. install in the new standard of less flights. , less travel in general and less consumption.

Related: The Beginning of a New Oil Market Supercycle So where will the future demand for oil come from? The short answer is, the same place it came from until now. It will just be a few million barrels a day less, for a while at least. Oil is not going anywhere and economies battered by the coronavirus will recover sooner or later. When they do, they’ll need more oil, and yes, that includes Europe, which has made a firm commitment to the green lane of renewable energy and electric cars. Even in Europe, the bulk of car sales are of vehicles with internal combustion engines.

Transportation fuels are a huge market for crude oil, and this market, as bleak as the current outlook is, will not go away. Nothing less than a mandatory shift to electric vehicles can destroy this market, and even the most progressive governments have so far stopped mandating such a shift. So even though fuel stocks are currently increasing because more gasoline and distillates are produced than what is used, the market will rebalance in the future. People will get used to the new normal and refiners will adjust their production, or a vaccine will be made available and we will go back to our old ways.

Even the demand for kerosene is not a primary cause. Air travel may have been the hardest hit segment of the transportation industry amid the pandemic, but the outlook is for growth. A recent report on air travel subscriptions predicts the global market to grow at a compound annual growth rate of 3.4% by 2027. It may not be a double-digit boom, but it is stable growth , although now almost all airlines are struggling, with some not surviving the current downturn.

Another area of ​​potential growth is plastics and petrochemicals. In fact, this is an area that the oil industry has targeted as a primary source of revenue going forward. A recent report The Carbon Tracker questioned the wisdom of this strategy, saying demand for plastics is declining, which could leave $ 400 billion in oil and gas assets stranded. Carbon Tracker’s argument is that Big Oil expects strong growth in demand for plastics, but that’s not coming due to the green backbone of governments and initiatives to tackle plastic waste.

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One wonders if this scenario will really play out. There have been many attempts to find cost effective alternatives to plastics, for example. Some of them have been successful and some not, but the fact remains that the world is consuming tons of plastic despite the alternatives. Until they remain the cheapest option – from the perspective of the end consumer if not from the perspective of climate preservation – plastics will have a market, not a small one.

Oil and gas, especially gas, for power generation is not going anywhere either despite the green push. Someday the world may be powered exclusively by renewable energy sources, but that day is far in the future if that ever happens. For an observable future, we will depend on fossil fuels.

The oil industry is not a happy place right now. It just might continue to be an unhappy place for a while. Nevertheless, the world still depends on what it produces, whether we like it or not. The industry will undoubtedly experience revenue and demand losses, but its main sources of demand will continue to be present even into 2050, when many of the government’s net zero rate plans are expected to be completed.

By Irina Slav for OilUSD

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